Geelong refinery buyer may be hard to find

Bidders for
Shell
’s Geelong oil refinery may be thin on the ground and the site may be converted into an import terminal even if buyers are found, experts believe.

The plant, accounting for about 17 per cent of Australia’s remaining refining capacity, was written down by $638 million last year – presumably to very little – and is thought to be losing money.

“I certainly don’t think there are any buyers [for Geelong] as a refinery," said CIMB energy analyst Mark Samter. “Never say never, but I would be surprised. The refineries are far too small, labour costs are far too expensive, the product slate is probably not too favourable."

Shell’s vice-president of downstream in Australia, Andrew Smith, shied away from revealing on Thursday whether there had been any early interest in buying Geelong.

But he said the refinery’s larger size, its niche product range and ability to process cheaper varieties of crude oil made it a more realistic sale prospect than the Clyde refinery, which was converted to a terminal without any attempt at a sale.

The Geelong plant, which treats 110,000 barrels per day of crude oil, can produce premium-priced aviation fuel, bitumen and solvents as well as the usual grades of petrol and diesel.

“There are other refiners who have different portfolios with different views of the future who may see that the Australian refining industry is a place where they can grow their business," Mr Smith said.

He pointed to the success that Shell had in selling other refineries around the world, including its Stanlow plant in Cheshire, which was sold to India’s Essar Group in 2011 for £735 million.

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Shell also sold its 17.1 per cent stake in New Zealand’s only refinery – along with its distribution and retail operations there – to Infratil and NZ Superannuation Fund in 2010 for $US696.5 million.

But the experience of the refining sector over the last 10 years points to a different story here. Shell converted Clyde into an import terminal last September with the loss of up to 245 jobs. It made no attempt at a sale.

Caltex Australia is also set to close its Kurnell refinery in Sydney next year and convert it to an import terminal. It previously wrote down the value of its two plants by $1.5 billion.

“The history of the Kurnell and Clyde closures suggest that the only feasible option for these refineries is to effectively close them down and convert them into import terminals," said one analyst. “It would be very difficult to find a buyer at a reasonable price."

Mr Samter suggested Caltex could be interested in buying Geelong, but as an import terminal, not a refinery.

A Caltex spokesman reiterated the company’s focus on marketing and distribution, and on transforming the company’s supply chain, and played down that possibility.

In previous years, opposition from the Australian competition regulator to consolidation in the refining and marketing sector has also been a hurdle to any mergers between plants.

However, that position may since have softened in refining at least given the changes in the Australian market, with imports now accounting for up to 40 per cent of requirements.

A major issue for any owner of Geelong is the massive cost that would be incurred to remediate the site should the plant be closed. Mr Samter said that as a refinery, the plant could have a negative value of more than $500 million.

In 2002, Australia had eight refineries, owned by four separate companies, that met three-quarters of motorists’ fuel needs.

Since then, ExxonMobil has closed its Adelaide plant, both Sydney plants have or are set to close, and Geelong’s future is seriously in doubt.